NewLink Genetics (NASDAQ:NLNK) is Ames, Iowa, based emerging biotechnology company in the field of immuno-oncology. The company's common stock sank last year after the failure of two Phase 3 trials of its HyperAcute cellular immunotherapy in metastatic pancreatic cancer. Afterwards, the stock more than doubled from its 2016 lows in anticipation of data from its IDO inhibitor pipeline and has pulled back from the recent highs, thus providing an attractive long entry point.

(NewLink Genetics, common stock price chart. Source: Bloomberg)

Product Pipeline:

(NewLink Genetics, IDO inhibitor immuno-oncology product pipeline)

The company's immuno-oncology pipeline is focused on the inhibition of IDO (indoleamine-2, 3-dioxygenase) pathway which is believed to be an immune checkpoint similar to PD-1 and CTLA-4 pathways. It is one of the handful of companies which are developing IDO inhibitors (and the one of two public ones). The IDO pathway regulates the immune response by suppressing T cell activation, which enables the tumor cells to evade the host immune response. IDO inhibitors are believed to be the next potential blockbuster class of checkpoint inhibitors. Incyte (NASDAQ:INCY)'s direct IDO enzyme inhibitor epacadostat is being tested in various solid tumors in partnership with Merck's (NYSE:MRK) Keytruda. Peak sales estimates for epacadostat are as high as $9 billion in various solid tumor indications.

(Mechanisms of actions of Indoximod and GDC-0919)

Indoximod: It acts on the T cells by mimicking tryptophan and, thus, signals the activation of T cells. It, thus, acts as an indirect inhibitor of IDO pathway. Indoximod attracted widespread investor attention after its recent data release in the treatment of advanced melanoma at the recently concluded AACR meeting. In an ongoing Phase 1b/2 trial in 60 patients enrolled so far, Indoximod and Keytruda combination resulted in 59% overall response rate (ORR) and 74% disease control rate (DCR). The cohort also included ocular melanoma patients (which have poor treatment response) and when these were excluded, ORR was 59% and DCR was 80%. The results were spectacular considering that Keytruda alone has shown ORR of only 33% in this patient population. A combination of Bristol-Myers Squibb's (NYSE:BMY) Opdivo and Yervoy (anti-CTLA-4) resulted in 58% ORR in advanced melanoma but had higher incidence of Grade 3 and 4 treatment-related adverse events (58% in the combination vs. 21% in Opdivo alone).

In a smaller Phase 1 study of 19 patients with advanced melanoma, Incyte's epacadostat and Keytruda combination resulted in 58% ORR, 26% complete remission rate (CR) and 74% DCR. The CR was lower in the above mentioned Phase 1b/2 trial of Indoximod+Keytruda (10%). However, Indoximod+Keytruda have shown efficacy and safety in the largest patient population of advanced melanoma treated with anti-PD1+anti-IDO combination so far, and till Incyte and Merck show efficacy and safety in a similar sized patient population, we like Indoximod in this indication so far.

In a Phase 1/2 trial, Indoximod+gemcitabine+abraxane resulted in impressive 45% ORR in metastatic pancreatic cancer (compared with 34% for Folfirinox regime and 9.4% for gemcitabine).

Indoximod is also being tested in various other cancers, and data from these indications is expected to be released over next 12 months. NewLink Genetics hold all worldwide commercialization rights to Indoximod. It will pay royalty payments on net sales of Indoximod (single-digit percentage) to Lankenau Institute of Medical Research, Augusta University, and Iowa State Department of Economic Development (ISDED). Various patents for Indoximod extend till 2027.

GDC-0919: It is a direct IDO enzyme inhibitor. Roche/Genentech (OTCQX:RHHBY) has licensed its worldwide commercial rights, thus showing confidence in its potential. In exchange, NewLink Genetics received $150 million of upfront payment and may receive up to $1 billion in future milestone payments and double-digit percentage of net sales as royalty payments.

A combination of GDC-0919 and Roche's anti-PDL1 Tecentriq is being tested in an ongoing Phase 1b, open-label study in various solid tumors like melanoma, NSCLC, head & neck squamous cell cancer, gastric cancer, ovarian cancer, Merkel cell cancer, cervical cancer, endometrial cancer, renal cell cancer, triple-negative breast cancer, and urothelial/bladder cancer. About 305 patients are planned to be enrolled. The estimated completion date of the trial is December 2018, but interim data is expected in mid-2017.

Various patents for GDC-0919 extend till 2032.

NLG802: NewLink Genetics is also developing NLG802, a prodrug of Indoximod to increase bioavailability and exposure. An IND was filed in 2017, and Phase 1 trial is expected to start this year.

Potential competition:

Other companies developing IDO inhibitors include Incyte, iTeos Therapeutics, and Redx Pharma.

HyperAcute Cellular Immunotherapy Program:

Despite failing in metastatic pancreatic cancer, a tough to treat cancer, this program is not dead yet. A combination of Tergenpumatucel with Indoximod and docetaxel is being tested in a Phase 1b trial in advanced non-small cell lung cancer (NSCLC). Dorgenmeltucel-C is being tested in combination with checkpoint inhibitors in a Phase 2 trial in advanced melanoma. Results from these trials are expected in 2018. Various patents for this program extend till 2029.

Vaccine program:

The company's Ebola Zaire vaccine has Breakthrough therapy designation from FDA. Interim data from a Phase 3 trial showed the vaccine's efficacy in preventing Ebola infection. Merck has licensed worldwide commercial rights to the rVSVG-ZEBOV GP vaccine (Ebola). NewLink Genetics received upfront $30 million and $20 million in milestone payments so far. It may also receive royalty payments on net sales of the vaccine.

Leadership:

CEO, chief scientific officer, and chairman of the board, Charles J. Link Jr. MD: He co-founded NewLink Genetics in 1999 and was a practicing oncologist for 18 years. He also served as the director of the Human Gene Therapy Research Institute at the Iowa Methodist Medical Center.

Co-founder and chief medical officer, Nicholas Vahanian, MD: He has led the algenpantucel-L (HyperAcute Cellular) program and worked at the National Cancer Institute and National Center for Human Genome Research Institute (both at the NIH).

Lead Director, Thomas Raffin, MD: He was the faculty member at the Stanford University School of Medicine for 30 years where he was the Colleen and Robert Haas Professor Emeritus of Medicine and Biomedical Ethics.

Director of the board, Paul R. Edick: He was the CEO of Durata Therapeutics, GANIC Pharmaceuticals, and MedPointe Healthcare.

Director of the board, Paolo Pucci: He is the current CEO of ArQule, Inc. He also worked as the senior VP of Bayer-Schering Global Oncology/Specialized Therapeutics Business Unit at Bayer AG.

Director of the board, Lota S. Zoth: She worked as the senior VP and CFO of MedImmune.

Financials and valuation:

NewLink Genetics is expected to have $131.5 million in cash reserves at the end of 2016. The operating cash burn was $65.9 million in 2016. The management expects to end 2017 with cash reserves of $75 million. We don't see any risk of equity dilution in 2017. The company has long-term debt of about $0.5 million and $6 million of royalty obligation to ISDED.

The size of melanoma market is $2.06 billion globally in the US and is expected to grow to $4.7 billion globally by 2020. About 76,000 new cases of melanoma are seen every year in the US and another 80,000 cases per year are seen in the EU. About 10% of these are diagnosed at advanced stage, thus providing our target market for Indoximod+Keytruda combination in advanced melanoma = 7,600 cases/year in the US and 8,000 cases/year in the EU. A combination of Opdivo and Yervoy is priced at average wholesale price = $256,000 in the US. Opdivo alone is priced at AWP of $150,000 in the US. We expect Indoximod to be priced in a similar range, thus providing us AWP = $106,000 in the US. At average sales price = 74% of AWP (average per Pharmagellan guide), we input ASP = $78,440 in the US. ASP of drugs in the EU and Japan is about 50% of that in the US. We input ASP = $39,220 in the EU. We input probability of reaching the market = 65% for the combination at this stage (average for drugs who passed Phase 2). The biggest competition for the combination in the melanoma market is Keytruda+epacadostat and Opdivo+Yervoy combinations. We input peak 20% market penetration in this indication for Indoximod+Keytruda combination in this combination in a base conservative scenario. Using these inputs, we modeled peak $106 million risk-adjusted revenue in this indication in the US+EU in 2024. Peak estimates for Opdivo+Yervoy combination in advanced melanoma is $350 million.

Peak sales estimate for epacadostat in various cancers is expected to be as high as $9 billion. Peak sales estimate for Tecentriq in various cancers is $3.5 billion in 2020. We are optimistic that GDC-0919 can achieve $1 billion in worldwide sales at the peak in combination with Tecentriq in various cancer mentioned above. Using probability of reaching the market = 60% at this stage and 20% of revenue as royalty payments for NewLink Genetics, we modeled peak $120 million risk-adjusted royalty revenue from GDC-0919 in 2024.

We also added NPV of potential $1 billion milestone payment from Genentech (equally distributed from 2017 to 2024, risk-adjusted at 60% probability and discounted at 15% for NPV of $336.5 million).

Using rNPV method (20% cost of capital), we calculated fair value of equity = $850.3 million after adjusting for non-operating assets, operating loss carry-forwards, and liabilities (using diluted share count) or $23.80 per share.

We are initiating coverage on NewLink Genetics common stock with Buy rating and first price target = $24.

We have not yet modeled revenue from Indoximod in other non-melanoma indications mentioned above, revenue from HyperAcute cellular immunotherapy pipeline, and Ebola vaccine program, which could add to further upside. We will adjust our model for these indications as we get more data.

Bristol-Myers acquired Flexus Therapeutics, another company developing IDO inhibitor pipeline (in preclinical stage) for $1.25 billion in 2015. In 2016, Merck acquired IOmet Pharma for its preclinical stage IDO inhibitor pipeline for $400 million.

OrbiMed Advisors, one of the largest healthcare institutional investors in the world, is the second largest investor in NewLink Genetics, and owns $33 million worth of stock (6.8% of the outstanding shares).

Several sell-side analysts reiterated Buy ratings on the stock recently, including Cantor Fitzgerald (PT = $20, April 4), and Stifel (PT = $26, April 4). SunTrust Robinson Humphrey considers NewLink Genetics as a takeover target and has price target of $30 on the stock.

Upcoming catalysts:

Risks in the investment:

It is possible that the ongoing clinical trials may fail, regulatory agencies might not approve the products, unexpected side effects might be seen in the future, clinicians might not widely prescribe the products, or insurers might not reimburse them. Competing products from other companies might gain significant market share in the planned clinical indications. The company may also need to raise additional capital in future.

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Disclosure: This article represents my own opinion and is not a substitute for professional investment advice. It does not represent solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment.

Disclosure: I am/we are long NLNK, INCY, BMY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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